target benefit plan

[mariemonroe]

I have a client with a target benefit plan with the target age of 65.

Many of the employees are working past this age and are upset because they are not receiving any benefit from the plan.

Is there any way to amend the plan to enable employees working past 65 to continue to accrue a benefit?

My understanding of the target benefit plans is limited but I don't think it is as easy as just changing the target age to 70.

I was thinking of suggesting that they amend and restate this plan as a profit-sharing plan (as no one can seem to remember why they have this type of plan in the first place).

Has anyone encountered this situation with a target benefit plan before?

Any advice?

Many thanks.

[Belgarath]

I'm guessing that the target plan was implemented to produce a higher percentage of a given allocation going to the older, highly compensated owners/employees. These were quite popular back in the days before "cross tested" profit sharing plans.

In a very general way, I'd guess that if those same employees who were to receive the lion's share of the benefits under the original plan are no longer there, or have a reduced contribution, that it would make a great deal of sense to look into some alternate plan design, such as a PS plan as you mention. Results are very "facts and circumstances" specific, so I have no guess as to the plan design that will ultimately prove most appealing to the plan sponsor.

[JAY21]

Would attaining the target retirement age by itself mean no additional contributions ? I wouldn't think that would be the case, though it's been several years since I did much with target benefit plans. I would think that if the participants are beyond the target retirement age they can still accrue benefits under the formula if they haven't earned the max years of service/participation allowed under the formula, then I would think their "target retirement age" would just increase by 1 each year of deferred retirement (e.g., 66) and the calculation done on that basis. I suppose that could still produce a zero contribution in some situations but not necessarily so. If I'm missing something or am incorrect just put me in my place.

Certainly considering a change to another type of DC plan seems like a good idea as well.

[david rigby]

Alternative: amend the plan to permit distribution to employees over 65 while still employed?

(Asusming 65 is plan's NRA.)

[mariemonroe]

The participants who are 65 have accrued their target benefit and therefore are receiving little or no additional contribution. They have no plans to stop working anytime soon and are not satisfied accruing little or no benefit. They are not interested in taking a distribution.

Does anyone see any reason I could not convert this plan to a profit-sharing plan?

I suppose I would have to issue a 204(h) notice.

Thanks for all of your comments. They are very helpful.

[david rigby]

Amend to increase the target benefit?

Amend to add a PS feature?

[AndyH]

mariemonroe, we need more information to provide you with an complete answer. Please specify the benefit formula. Also, please specify whether or not the plan is intended to comply with the safe harbor target rules or is general tested. There are important differences that would affect the post nrd calculation, specifically the requirement that the annuity rate after nra be equal to the annuity rate at nra for somebody past nra in a safe harbor plan, plus the prior theoretical reserve and normal cost are increased at an interest rate of 0% after nra.

This means that if the person experiences an increase in average comp, the contribution must increase or it is being calculated incorrectly.

BTW, a minimum allocation of 3% or 5% or whatever might work for you rather than messing with the formula.

[mariemonroe]

The benefit formula is: 1% of final average monthly compensation times years of service after 6/30/92 plus 3% final average monthly compensation times years of service prior to 7/1/92, not to exceed 5 years of service

This plan is general tested.

Other plan document info:

...for purposes of determining the Employer's level annual contributions to the plan, it shall be presumed that the lump sum actuarial equivalent at NRD of the assumed pension benefit is based on the 1983 Group Annuity Mortality Table - Male, 7.5% interest and a single life annuity. It shall be further premued that to accumulate to such lump sum equivalent, the annual net average rate of return of the trust assets shall be 7.5%. The Employer's contributions for a participant shjall not be increased or decreased to reflect actual benefits.

NRD is: Valuation Date coinciding with or next preceding the day on which the Participant attains his Normal Retirement Age (65), unless the Participant's employment is continued beyond such date in which case the Participant's Normal Retirement Date shall be the Valutation Date coinciding with or next preceding the day on which he actually retires.

My understanding from the plan actuary is that once a participant reaches his theoretical reserve he is no longer entitled to a contribution regardless of what his actual account balance is.

[AndyH]

Thanks.

Re terminology, the "theoretical reserve" is the term used in the safe harbor regs (1.401(a)(4)) to describe the make-believe account balance. If the present value of the projected benefit does not exceed the theoretical reserve then there would be no contribution due.

In a non safe harbor plan the term "theoretical reserve" might not be relevant depending upon the funding method being used.

It seems to me that the simplest solution might be to provide a minimum contribution of x% of pay and you could limit it to those with more than y years of service or greater than a certain age if you prefer. The contribution would be the greater of the target formula or the minimum contribution. You would need to make sure there are no testing problems, but if the affected people are NHCEs then there would be no issue.